Dolat Capital recommended accumulate rating on HCC with a target price of Rs 43 in its research report dated November 03, 2017.
Dolat Capital's research report on HCC
Q2FY18 standalone revenue increased by 6.5% YoY to `9.7bn (in-line with estimates) due to better execution. Excluding claims of `1.85 bn (`1.8 bn in Q2FY17), core revenue grew 7.5% YoY to `7.9 bn. EBITDA margin contracted 607bps YoY to 15.3% (112bps below estimates) due to lower EBITDA margin of 27% vs. 50% on claims recovery. Excluding claims, core EBITDA margin declined 179bps YoY to 12.6%. Interest cost dropped 14.2% YoY /10.5% QoQ to `1.63bn. Reported PAT decreased 49.7% YoY to `116mn (35.1% below estimates). HCC could reduce its debt by `4.5 bn during 1HFY18 despite arbitration cash flow of `10.97 bn due to encashment of `1.8 bn bank guarantee by IRCON and adjustment of `1.2 bn by NHPC. We considered `15bn debt reduction each in FY18E/ FY19E due to receipt of arbitration claim money. We have considered 40% (earlier 50%) success for `43 bn (as on FY17) claims which are under arbitration and outcome is likely to come by FY19E as per new Arbitration Act. Our FY18E/ FY19E revenue `48.5 bn/ `63.3 bn (up 15.5%/ 30.5% YoY) includes `6.4 bn / `10.7 bn claims awards and 15%/ 25% YoY growth on core revenue. We have considered 35% EBITDA margin on claims award and 13% on core EBITDA margin in FY18E/ FY19E. Interest cost will see a significant decline in FY18E/ FY19E to `5.5 bn/ `3.2 bn vs. `7.7 bn due to `30 bn debt reduction during FY18-19E. Therefore, Adj. PAT is expected to jump 3.4/ 8.0-fold in FY18E/ FY19E to `2.4 bn/ `5.7 bn vs. `713 mn.
We valued construction business based on FY19E core EV/ EBITDA as it does not contain any claims and which is sustainable. However, due to limited upside potential, we maintain ‘Accumulate’ with an SOTP-based TP of ` 43.4 (Exhibit 1).
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